Solactive and Belfius have teamed up for the launch of the Solactive Digital Economy Index, a smart beta strategy that allows investors to gain exposure to the digitalisation trend in world economies and societies.

The index, which was launched on February 8, 2017 and is licensed to Belfius Bank & Insurance for the issuance of structured products, mirrors the performance of 50 European companies whose business models are likely to be affected by digitalisation, while tilting the composition towards dividend-paying, low-volatility stocks.

The idea for the Solactive Digital Economy Index was initiated at Belfius because the bank has a digital growth strategy, according to Guillaume Fabre (pictured), senior equity derivatives trader at the Belgian bank. "We thought it would, therefore, be a good idea to issue a structured product linked to an index with a digital theme," said Fabre.

Because retail agents are already familiar with the digital theme it would be easy for them to sell such products, according to Fabre. "[Digital] is a word you hear everywhere," said Fabre. "Obviously, every business is impacted by the digitalisation of their activity. That's how it started. What happened next was proposing a set of rules to Solactive and they helped us to build the index, to compute it every day; with all the logistics. It was a first for us. Obviously, we issue structured products every month, but to create an index is something new for Belfius."

The two concepts behind the smart beta strategy are well understood by retail investors, according to Fabre. "Firstly, there is the concept of high dividend, which is related to value stocks and growth stocks," said Fabre. "Then there is the concept of volatility, which is directly related to risk. This is also something quite important for the investor and quite easy to understand. For structured products, it is a way to make them more attractive and a way to compete with benchmark indices."

The index blends two important themes in indexing, which include digitalisation, disruptive technologies and some kind of smart beta overlay to make it attractive to the structured products world, according to Henning Kahre, head of research at Solactive. "In the ETF space, we have seen a lot of inflows into low volatility and into dividend concepts; also from the retail side," said Kahre. "This is definitely something that has gained a lot of traction in the recent past."

In Belgium, there were 170 structured products linked to a single index in 2016, according to SRP data. Of these, only 28 were linked to benchmarks (the Eurostoxx 50 and Bel 20), with the remaining products linked to proprietary and smart beta indices, a trend which, according to Fabre, can be directly attributed to the moratorium on the distribution of particularly complex structured products that was launched by the Financial Services and Markets Authority in July 2011.

"Most banks in Belgium willingly complied with this moratorium, which limits the number of mechanisms you can have to calculate the payout of a structured product," said Fabre. Structured products are less complicated these days, with banks competing more on the underlying than on the structure, according to Fabre. "That's why you see so many different indices emerging in the Belgian market, because before banks would issue more complicated structures on benchmark indices, but now they are issuing simpler structures on more complicated indices. Complexity of the structure is no longer the differentiating factor."

The first product linked to the index, the capital protected Euro Multicallable 04/2025, which can be called by Belfius at the end of every year (from the second year onwards), is in its subscription period. "Our plan is mainly to use the index for senior unsecured bonds issued by Belfius," said Fabre.

Belfius issued 48 structured products worth €861m in Belgium last year. This year to date the bank-insurer has distributed 15 products with estimated sales of €188m, according to SRP data.

The Solactive Global Digital Index includes European companies and is calculated as a price return index and denominated in euros. The weight of each of the 50 shares in the index is based on the inverse of their 12-month historical volatility, with a cap of maximum 10 stocks per digitalisation theme. The index, which is based on 100 at the close of trading on the start date (June 7, 2006) closed at 135.41 on March 13, 2017. The composition of the index is readjusted quarterly.

Click the link to read the Solactive Digital Economy Index guideline and the latest factsheet.

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